Good day, and welcome to Laureate Education's Fourth Quarter and Year-End 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Morse, Senior Vice President, Corporate Finance. Please go ahead..

Good morning, and thank you for joining us on today's call to discuss Laureate Education's fourth quarter and year-end 2023 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and Rick Buskirk, Chief Financial Officer.

Our earnings press release is available on the Investor Relations section of our website at laureate.net. We have also posted a supplementary presentation to the website, which we'll be referring to during today's call. The call is being webcast, and a complete recording will be available after the call.

I would like to remind you that some of the information we are providing today, including, but not limited to, our financial and operational guidance constitutes forward-looking statements within the meaning of applicable U.S. securities laws.

Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S.

Securities and Exchange Commission earlier this morning as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call, and we undertake no obligation to update any forward-looking statements.

Additionally, non-GAAP measures that we discuss, including and among others, adjusted EBITDA and its related margin, total debt, net of cash and free cash flow are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation. Let me now turn the call over to, Eilif..

in Peru, for the third consecutive year, UPC was ranked the #1 education brand in the country by Merco. And even more impressively, it was ranked #9 among all foreign and domestic consumer good brands in the country. and we ranked ahead of companies such as Scotiabank, Toyota and Microsoft and just behind Google and Nestle.

And in Mexico, UVM was ranked the second best private university according to the Reader's Digest 2023 rankings, second only to Tec de Monterrey. We remain confident in our future growth outlook and believe that demand for quality higher education in Mexico and Peru would continue to grow in the years to come, supported by 3 key factors.

First, the steady increase in participation rates, driving robust demand for higher education in both countries underpinned by the attractive wage premiums for individuals with higher education degrees and the affordable cost to get them.

Second, the vital role of the private sector in advancing higher education due to limited government resources with private institutions now providing over 50% of the combined university seats in Mexico and Peru. And third, substantial demand for upskilling of the labor force.

We expect the ongoing nearshoring trends to further accelerate this demand in Mexico, providing a compelling opportunity for higher education institutions like Laureate.

During our year-end 2022 earnings call, we announced that we will strive for continued organic growth momentum and for Laureate to deliver a financial profile over the next 3 to 5 years in which we pursue 3 key objectives. First, a target 8% to 10% compound annual growth rate in revenue on a constant currency basis.

Secondly, we pursue a capital-light expansion strategy with the objective of delivering 40% to 60% of teaching hours online, resulting in CapEx spending being below 5% of revenues. And finally, we target adjusted EBITDA margin of 30% and adjusted EBITDA to unlevered free cash flow conversion of more than 50%.

In 2023, we outperformed our growth objectives. We achieved our online hybridity goals and delivered on our 50% free cash flow conversion when excluding certain cleanup items related to unwinding legacy Laureate.

Despite the near-term impact of an economic slowdown in Peru, we maintain our 3- to 5-year growth profile on a CAGR basis given the strength of our brands and strong positioning in Mexico and Peru. And we target to deliver 30% adjusted EBITDA margin and 50% or greater free cash flow conversion by end of 2025.

As for our 2024 outlook, we continue to see strong opportunities for growth, fueled by favorable secular trends. However, we are experiencing different market conditions in Mexico versus Peru, which we believe will cause 2024 top line growth to be slightly below our midterm expectations.

The macroeconomic backdrop in Mexico is favorable with robust manufacturing and construction activities, growth in real wages and increased private consumption. The nearshoring impact is starting to be felt across the economy.

For Laureate, we expect to see increased participation rates in higher education as well as higher demand for reskilling and upskilling of the labor force. The market dynamics in Peru are currently more challenged. Peru has been a strong growth market for Laureate for many years.

In the second half of 2023, Peru encountered an economic downturn as a result of political and weather-related events. These conditions are expected to persist through the first half of this year. However, most economists are forecasting an economic recovery in the second half of 2024, which is in line with our outlook.

As a result of these differing market dynamics, we expect higher growth rate in Mexico versus Peru this year. Our guidance call is for Laureate's consolidated revenue to grow 5% to 6% on a constant currency basis for 2024.

We However, as we enter 2025, we do expect to be at a higher growth rate, which is more aligned to our steady-state, targeted growth profile.

That concludes my prepared remarks, and I will now turn the call over to Rick Buskirk for a more comprehensive financial overview of the fourth quarter and the full year 2023 performance as well as further detail on our 2024 outlook.

Rick?.

total enrollments to be in the range of 467,000 to 473,000 students, reflecting growth of 4% to 5% versus 2023. Revenues to be in the range of $1.553 billion to $1.568 billion, reflecting growth of 5% to 6% on an as-reported basis and 5% to 6% on an organic constant currency basis versus 2023.

Adjusted EBITDA to be in the range of $441 million to $451 million reflecting growth of 5% to 8% on an as-reported basis and 6% to 9% on an organic constant currency basis versus 2023.

This will result in an increase in adjusted EBITDA margins of approximately 40 basis points at the midpoint of our guidance on a reported basis or approximately 50 basis points on a constant currency basis.

We anticipate further margin expansion to be driven by Mexico as well as lower corporate expenses, partially offset by a slight decline in margins in Peru due to pricing pressures related to the current environment. Lastly, for 2024, we expect adjusted EBITDA to unlevered free cash flow conversion in the high 30% range on a reported basis.

As we have discussed on prior calls, we are still in the process of winding down legacy Laureate and noted that those activities would run through the end of this year. Our 2024 cash flow expectations include onetime legacy Laureate payments of approximately $45 million, primarily related to deferred taxes.

Absent these Laureate cleanup items, our adjusted EBITDA to unlevered free cash flow conversion is expected to reach approximately 50% in 2024 on par with the level we achieved in 2023 in our stated target profile.

As a reminder, our cash flow seasonality is heavily weighted towards the second half of the year due to the timing of tax payments and collections. In 2024, that impact will be more pronounced due to some of these legacy cleanup items which we expect to occur in the first half of the year.

Now moving to the first quarter guidance and starting with 3 key points. First, just a reminder that Q1 is a seasonally low quarter as classes are largely out of session in January and much of February. Second, we have a shift in the academic calendar of 1 to 2 weeks for certain programs in both Mexico and Peru.

We anticipate that this will move approximately $12 million of revenue and $10 million of EBITDA from Q1 to later in the year. This is just an intra-year timing item. Third, we anticipate $5 million of onetime restructuring charges during the first quarter in Mexico related to our margin optimization plan, which is going very well.

For the first quarter of 2024, we expect revenue between $266 million and $271 million, adjusted EBITDA of approximately $23 million to $26 million. That concludes my prepared remarks. Eilif, I'm handing it back to you for your closing comments..

Thank you, Rick. The secular trends for higher education remains strong in both Mexico and Peru. As the largest private provider of higher education in both markets, we are well positioned to capitalize on growth opportunities with our leading brands, strong digital capabilities and focus on academic quality and student outcomes.

Our growth-oriented business model is distinguished by durable and recurring revenue and cash flow generation and we have a strong balance sheet and a track record of returning excess cash to shareholders, which will continue to be a priority for us.

As an established emerging market company with a developed market governance, we are looking forward to another strong year in which we continue to create value for all stakeholders. Our focus remains on transforming the lives of students and communities in our markets by providing greater access to affordable quality education.

Operator, that concludes our prepared remarks, and we're now happy to take any questions from the participants..

[Operator Instructions] And our first question comes from Jeff Silber with BMO Capital Markets..

You talked about the expected economic recovery in Peru in the second half of the year that will hopefully impact your business in a positive way.

But I'm just curious shouldn't there be some sort of lag? I mean, the minute the economy starts to pick up, do students automatically go back to school on day 1 or they kind of have to rethink it and then decide a little bit later? Just curious on your thoughts..

I think what we have experienced over the last 6 months or so is unusual concerns by the Peruvian consumers, given the political disruptions in first half of last year as well as concerns about this linear weather event for the first quarter of this year.

We are seeing the economy -- there was a recession last year, negative GDP of about 0.5% and we are seeing no pickup in recovery and most economic forecasters and banks are projecting a robust recovery in the second half.

So we do expect the -- what we call the C1 intake, the main intake in Peru this year to be a little softer, reflecting the economic conditions but we do expect the small or secondary intake in September to reflect more normalized economic environment..

Okay, fair enough. In your prepared remarks, you talked about the favorable price mix. I know that led to higher revenue per student. I'm assuming it was a mix to more premium brands.

Can you talk about how your portfolio is doing between the premium brands and the other brands?.

Yes. I think in general, it's doing well. The premium brand in Mexico in both -- in Mexico, both brands, UVM, our premium brand and UNITEC are doing very well. We saw very high performance in both brands in terms of traditional undergraduate as well as we saw double-digit growth in fully online.

In Peru, we saw a little bit more pressure last year in the fourth quarter -- third and fourth quarter in the premium brand as we saw some students potentially trading down into the value brand but we saw a little bit higher in the value brand in Peru last year..

All right. And 1 final question. You talked about this year, the margin accretion mostly driven by Mexico's continued margin optimization. I know you've got a goal for 25%.

How do we get from where you are now to that 25% number?.

Yes, sure. So first off, incremental operating leverage on incremental revenue is significant over 50% given our capacity in our campuses that we have in Mexico right now. And then the secondary aspect of it is we continue to optimize our real estate experience in Mexico.

We've announced some optimizations in the fourth quarter of some campuses and that will contribute, and we're also doing a restructuring event in the first half of this year, which we called out in the first quarter of around $5 million, and that alone will contribute 50 basis points plus of margin contribution.

So it's a combination of operating leverage, very healthy flow-through on incremental revenue and experiencing good growth in Mexico and the secondary impact of it is cost efficiency initiatives, including real estate optimization..

I would just add that we have a high confidence level in achieving this. These are the annualization benefits of actions that we have taken or actions that are in flight, that we have high experience level in, and that gives us the confidence level in achieving our margin goals in Mexico..

[Operator Instructions] Our next question comes from Lucas Nagano with Morgan Stanley..

We had 2 questions, the first 1 is related to the medium-term target you released that it implies a higher growth rate for '25 onwards compared to this year? And will it be more related to the recovery in Peru or the nearshoring trends in Mexico? And also how much of this near-shoring impact is visible at this point? And second question is related to capacity.

You're still in a phase of maturing the campus occupancy and online education.

But will you start to consider expansion in the next years?.

Great, thanks for those two questions. In terms of the higher growth rate, the normalization back to high single digit, low double-digit growth rate for Laureate. That's really just getting the normalization from Peru, Peru is in a recession, and our guidance is more in a steady state economic cycle. So any nearshoring benefit might be an upside.

And I'll just underscore, nearshoring is going to really come in 2 forms for us. One is increased participation rate, which is going to just be a direct benefit to our traditional undergraduate business.

And then additional tailwind would likely come from short courses, more technical expertise geared directly to what businesses need, industry need in order to facilitate the transition of the supply chain from Asia to Mexico to serve the United States.

So that latter part is not really built into our projections because that isn't part of the core business. I'll pause there and see that answers your question..

Yes.

And is it possible to comment a bit on the potential campus expansion plans like what are sort of the medium term or longer term?.

Sure. I think that was your second question on capacity. And you know we have gotten a bit of a CapEx holiday in 2020, 2021 and 2022 and into 2023 because of the increased hybridity percentage. It's given us an ability to really get more throughput from existing physical plans.

And hence, we have had robust growth over the last several years without any new campus development. In 2024, we will start developing a couple of new campus projects for launch in 2025. So there will be new physical footprint coming onboard in late '24 into 2025 and beyond.

But I want to underscore that these new campuses that we are building has -- is much more capital-light in nature than our historical campuses because, again, they are heavily dependent on hybridity and digital learning. So that means that the ROIC on these new campuses are very, very attractive..

That does conclude the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect..

Thank you, everyone..

Thank you..